Four Things to Know About How the U.S.’ Chip Controls Will Impact China

By Du Zhihang, Liu Peilin, Qin Min and Wang Xintong

The U.S.’ latest sweeping crackdown on China’s semiconductor industry will have a limited negative impact on Chinese companies, but potentially accelerate the country’s development of cutting-edge technologies, according to industry insiders and experts.

The U.S. Department of Commerce’s Bureau of Industry and Security (BIS) last week announced a new round of sanctions aimed at further curbing China’s ability to produce advanced chips used in its military modernization.

The bureau added 136 more Chinese companies and four China-linked firms to its Entity List, a trade blacklist that will block them from accessing U.S. advanced chip and AI-related technology. The bureau also announced new export curbs on semiconductor equipment and high-bandwidth memory (HBM) — critical to both large-scale artificial intelligence (AI) training and inference and a key component of advanced integrated circuits (ICs).

These are the latest in a string of sweeping controls on technology exports imposed by the Biden administration to stifle China’s semiconductor industry. The controls were initially imposed in October 2022 and have been revised and strengthened at least twice, including in October last year.

The latest revision broadens the scope of the curbs — targeting China’s entire semiconductor supply chain and its ability to use advanced memory technology to train and scale AI models, which has become a battleground in the tech rivalry between Beijing and Washington. Although the restrictions drew strong criticism from Beijing, they may backfire, according to industry insiders. Previous sanctions have already pushed Chinese manufacturers to seek domestic alternatives to U.S. technology, furthering China’s efforts to achieve self-reliance in chip production.

The sanctions create strong motivation for China to forge its own path rather than follow U.S. routes, said a person familiar with China’s semiconductor policies. Several Chinese companies are already taking this approach.

Though Chinese firms may initially face higher costs and performance issues, independent control over equipment and technology could ultimately help them survive the tougher crackdown, the person said.

“Originally, we were closely following the innovation systems of others, but now every segment of the industrial chain has been driven into a corner, forcing us to find our own path,” he said.

What are the key components of the new export controls?

AI-related technology: The new controls apply to U.S.-origin HBM as well as certain foreign-produced HBM that uses U.S. technology or software.

HBM are basically stacks of memory chips that are designed to provide high bandwidths while using less power.

The BIS added a rule specifically for HBM having a “memory bandwidth density” greater than 2 gigabytes per second per square millimeter. “All HBM stacks currently in production exceed this threshold,” the bureau said.

The move is intended to prevent companies from circumventing export restrictions. “BIS uses the bandwidth density — rather than just the bandwidth — to ensure controls will still apply if an IC uses a larger quantity of smaller HBM chips at little additional cost,” the bureau said.

Chipmaking equipment: The new restrictions also cover 24 types of chipmaking equipment, including tools that can be used to produce both lower- and high-end chips.

This aims to close a loophole where Chinese companies could acquire equipment ostensibly for lower-end chip production but potentially use it for manufacturing advanced chips.

After previous rounds of U.S. sanctions restricting the export of more advanced semiconductors and manufacturing equipment to China, domestic chipmakers have ramped up production of mature process chips — industry parlance for the less sophisticated, legacy semiconductors that tend to involve processes at or above 28 nanometers.

This made Washington wary. In announcing the new rules, the BIS also added eight new “Red Flags” to alert U.S. exporters to situations such as non-advanced facilities ordering equipment designed for advanced chip production, or orders from plants adjacent to advanced chip facilities.

How does this round of controls differ from previous restrictions?

The Biden administration’s latest crackdown is more intense and extensive than its previous actions, effectively dealing a “fatal blow” to China’s semiconductor supply chain, a senior industry insider told Caixin.

U.S. Commerce Secretary Gina Raimondo made a similar comment on social media platform X: “No Administration has been tougher in strategically addressing China’s military modernization through export controls than the Biden-Harris Administration.”

According to law firm King & Wood Mallesons, 71% of the 140 companies newly added to the Entity List are semiconductor equipment manufacturers, 7% are advanced electronic materials companies and 5% are electronic design automation (EDA) companies.

The sanctioned entities encompass virtually all leading companies across China’s semiconductor supply chain, the senior industry insider said. This is a departure from previous rounds of sanctions, which mainly targeted major players in chip manufacturing and design, such as Huawei Technologies Co. Ltd. and Semiconductor Manufacturing International Corp.

The bureau also expanded the scope of what Beijing calls “long-arm jurisdiction.” It said certain semiconductor manufacturing equipment should be subject to controls when produced abroad and destined for more than 20 countries and regions — including the Chinese mainland, Hong Kong and Macao — if it’s directly produced with U.S. technology or otherwise contain a critical component that could not have been produced without U.S. technology.

Previously, foreign-made semiconductor manufacturing equipment had to contain more than 25% U.S. components to be subject to the U.S.’ Foreign Direct Product Rules, according to Gao Ruidong, chief economist of Everbright Securities Co. Ltd. Now, any use of U.S. technology in manufacturing — be it lithography tools in the Netherlands or memory components in South Korea — will trigger U.S. export controls, he pointed out.

Notably, the new controls on HBM add to previous export restrictions on advanced graphics processing units, which can be used to train AI models, signaling Washington’s determination to further curb China’s development in this cutting-edge technology.

Wu Zihao, CEO of semiconductor consulting firm RHCC, told Caixin that currently, HBM’s main practical application is in AI chips.

Although Chinese companies could independently develop AI products, it will take longer and cost more, Brady Wang, associate director of Counterpoint Research, told Caixin, noting that the U.S.’ move is essentially intended to slow down China’s AI development.

President Joe Biden attends an event to support legislation that would encourage domestic manufacturing and strengthen supply chains for computer chips in the South Court Auditorium on the White House campus, on March 9, 2022, in Washington D.C. Photo: VCG

How will the new rules impact China’s AI and chip industries?

“The parameters such as density and bandwidth specified by the U.S. this time are essentially restricting the export of HBM2 (second generation) or higher versions of HBM,” the person familiar with China’s semiconductor policies told Caixin.

The first-generation of HBM was co-developed by South Korea’s SK Hynix Inc. and California-based Advanced Micro Devices Inc. and launched in late 2013. Since then, the technology has been through five generations — HBM1, HBM2, HBM2E, HBM3 and HBM3E. The more recent the generation, the more it can support larger AI model operations and provide faster data processing.

At present, most AI chip products in China rely on HBM3 from Samsung Electronics Co. Ltd. and SK Hynix. Since domestic companies still hold some inventory, the impact of the U.S. controls is limited in the short term, but domestic HBM manufacturing still needs to achieve breakthroughs in the long run, an employee at a leading AI chip manufacturer in China told Caixin.

It is not an easy task for Chinese companies. The U.S. has previously barred Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC) from providing its advanced packaging technology — chip-on-wafer-on-substrate (CoWoS) — to mainland firms. CoWoS is the mainstream packaging technology and crucial for advanced HBM manufacturing.

Mainland manufacturers have developed similar advanced packaging technologies, but since there is little mass production of HBM in China, these domestic manufacturers have little experience of scaling their processes. This makes it hard for them to improve product quality and ultimately the yield rate of HBM, according to a research report from Huayuan Securities Co. Ltd.

A memory industry insider is concerned that since SK Hynix and Samsung entered the HBM market early and established patent barriers, it will be difficult for Chinese HBM producers to catch up by following the same technological path. And even if they develop HBM through other methods, the high costs would make large-scale commercialization challenging, the insider said.

China’s challenge in terms of HBM lies in relying solely on itself for both memory production and packaging, Wu noted.

Meanwhile, several newly blacklisted companies in China’s semiconductor supply chain said the new controls will have limited impact on their operations.

An employee at a semiconductor equipment manufacturer told Caixin the company’s core components are mostly produced in-house, while they can find domestic alternatives to the parts they procure from overseas suppliers.

The company also plans to increase component research and development (R&D) in the future, the employee said.

Early this week, Empyrean Technology Co. Ltd. (301269.SZ -0.75%), which makes EDA software, a fundamental tool for designing microchips, announced that a state-owned company was taking control of its board in the wake of it being placed on the U.S.’ Entity List.

The board change is part of its efforts to build up its EDA capabilities to address bottlenecks in China’s semiconductor industry, Empyrean said.

The U.S.’ tighter restrictions in recent years have forced many Chinese semiconductor manufacturers to seek domestic alternatives to key components or invest more in developing their own equipment.

A former executive at a wafer manufacturing plant in southern China told Caixin that Chinese wafer manufacturers are now using domestic equipment as much as possible in their expanded production lines and new plants. “In some new wafer production lines, domestic equipment accounts for as much as 40%, which was unimaginable before,” he said.

In recent years, China has been rapidly closing the gap across many facets of the semiconductor production process, with localization rates for some equipment now reaching 20%-30%, Huatai Securities Co. Ltd. said.

Gu Wenjun, chief analyst at research firm ICwise, expected that the semiconductor industry’s localization rate will surge and the technological gap will rapidly diminish over the next two to three years, as Chinese manufacturers ramp up R&D and production.

“While the latest round of export controls may cause short-term disruptions to the supply chains of Chinese semiconductor equipment companies, they are unlikely to derail the industry’s long-term growth trajectory,” said Everbright Securities’ Gao.

How has China responded?

China responded immediately to the latest U.S. action with a tit-for-tat ban. On Dec. 3, the Ministry of Commerce announced it was banning exports to the U.S. of various critical minerals that have both civilian and military applications. The ministry had already tightened controls on exports of the minerals, which are used in the manufacture of semiconductors, by requiring exporters to obtain licenses. But the latest measures specifically target the U.S., completely banning shipments of “dual-use” items to U.S. military suppliers or for military purposes, and “strictly controlling” exports to the U.S. of critical minerals including gallium, germanium, antimony, superhard materials and graphite.

Gallium and germanium, for which China is a leading exporter, are essential materials used in the production of semiconductors, LEDs and photovoltaic cells, while graphite is used as an electrode material in batteries used to power electric vehicles.

The action was taken “to safeguard national security and interests,” a spokesperson for the ministry said in a statement. The official accused the U.S. of abusing export controls by unjustifiably restricting exports to China and blacklisting Chinese enterprises, undermining international trade.

The impact could be huge. A study released last month by the U.S. Geological Survey indicated that a complete ban by China on gallium and germanium exports could result in a $3.4 billion reduction in U.S. GDP.

On the same day as the commerce ministry announcement, associations representing China’s semiconductor, internet, automotive, and communications industries urged companies in their industries to exercise caution when procuring American chips.

Although the appeals from industry associations lack binding force, they will undoubtedly influence Chinese companies’ purchasing decisions in the mid to long term, a salesperson from a major American chip manufacturer told Caixin.

Losing Chinese customers could be costly for American chipmakers. Take Qualcomm Inc. as an example: the telecom chip giant secured approximately 65% of China’s orders for chips used in cars’ smart cockpits in the first half of 2024, according to consultancy Sigmaintell. It also generated nearly half of its revenue from China in the year ended Sept. 19, according to its fiscal report released last month.

Meanwhile, fellow U.S. chipmaker Nvidia Corp. — which reported 17% of its revenue came from China in the year ending Jan. 28 — has been caught in the crossfire in the tech trade war. On Monday, China’s market regulators opened an antitrust investigation into the company over suspected violations linked to a 2020 deal, a move widely seen as a retaliatory shot against Washington’s latest curbs on the Chinese chip sector. Nvidia on Tuesday asserted its commitment to fair competition.

Foreign companies clearly want to keep doing business with China. Despite the tech war, U.S., Japanese, and Dutch semiconductor equipment companies continue to see sustained revenue growth in China, with American firms using foreign production to circumvent export controls in order to reach the Chinese market. U.S. International Trade Commission data on “Semiconductor Machinery Manufacturing” exports and revenue figures from leading U.S. chip companies show an increasing divergence, with the ratio rising from 1.6 in 2021 to 3.1 in the first three quarters of 2024, reflecting the firms’ growing reliance on exports from other countries to continue supplying equipment to China, according to Gao’s data.

Ultimately, the Biden administration’s chip export restrictions could hinder American companies and have a limited impact on China’s industry.

“The divergence (in export and revenue figures) underscores how the administration’s semiconductor export controls against China often disregard corporate interests, leading to limited cooperation from U.S. businesses and restricting the effectiveness of the technological blockade against China,” said Gao.

Zhai Shaohui contributed to this story.

Contact reporter Wang Xintong (xintongwang@caixin.com) and editor Jonathan Breen (jonathanbreen@caixin.com)

caixinglobal.com is the English-language online news portal of Chinese financial and business news media group Caixin. Global Neighbours is authorized to reprint this article.

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